Monetary Stabilization in Brazil: Evidence from Pharmaceutical Trade for the Impact of the Plano Real
Will, Peter C., O'Keefe, Hsu, Goldenberg, Irene, MACLAS Latin American Essays
The presence of hyperinflation in Brazil for most of the period from 1980 through 1993 had many effects on the Brazilian economy.(2) These effects included a perversive process of inflationary taxation, changes in income distribution, and alterations of normal business practices. To reduce inflation after such a long period of accommodation, each of these effects must be countered by altering behavior with governmental policies or by other means.
The perversiveness of inflation is due to the creation of an extremely high inflationary tax on income without any correlation with productivity. Therefore, individuals and institutions substitute financial speculation for risk investment.(3) Over time, this speculative behavior attenuated the level of economic activity and therefore reduced the living standard of the Brazilian people. These effects took place in most sectors of Brazil through most of the period from 1980 through the middle of 1994.
Until July 1994, Brazil had an average monthly inflation rate of 30 to 50% or approximately 7,000% per year.(4) The major effect was a generalized tax for the less-advantaged segment of that society.(5) This tax was applied to most individuals either because they were not in the higher income segment of the work force, or because they did not have access to the sophisticated deposit-indexing services of the banking system.(6)
Inflation was so pervasive that the income of the poorest 50% of Brazil's population was declining during the period between 1980 and 1990.(7) Income inequality, and thus social inequality increased during this period. Families, whenever possible, rapidly spent their cash income as a means to counter its loss of value, or they were paid directly for services in the form of goods.(8)
In order to maintain the living standard of a growing population with a growing economy, large continuous investments are required. For these investments to take place, minimal economic stability is necessary. In a hyperinflationary environment, prices have constantly been nonaligned and resources have been shined to activities with high short-run returns.(9) Consequently, financial speculation in Brazil was substituted for risk investments in a search for returns proportional to inflation.(10) This activity created a serious barrier to sustainable development of the Brazilian economy. An example of this effect was the stagnation of pharmaceutical investments in new products in Brazil throughout the 1980s and the early 1990s.
Hyperinflation also increases transaction costs. The government, by imposing interest rates of 36% above the inflation rate, encouraged companies to enlarge their finance departments and to overly rely on calculated short-term financial returns.(11) While these and other business practices often make sense during hyperinflationary periods, reversing such practices has been the cause of many social and political problems in Brazil since July 1994.(12)
Although problems with financial investment, banking practices, consumer spending, and government monetary and fiscal policies were present in most sectors of the Brazilian economy, we have chosen to examine the pharmaceutical sector as an indication of how a specific industry responds to a change in inflation. This response was studied by examining the characteristics of pharmaceutical trade during and after a period of high inflation.
The pharmaceutical industry is appropriate for such a study for several reasons. Pharmaceuticals are goods that are consumed by most individuals in a society, and therefore changes in pharmaceutical consumption would be a measure of widespread consumption changes. Furthermore, the pharmaceutical industry in Brazil is relatively large (employing approximately 100,000 people in 1992); is relatively competitive as indicated by the large number of firms in the industry and the lack of a clear market control by any one firm; and is actively involved in pharmaceutical trade both regionally and internationally. …